ETFs finally find a crisis they can’t trade through in Ukraine

From the pandemic to the Greek debt crisis, ETFs have operated like it was business as usual during some of the toughest times in markets. But with Russia’s war on Ukraine, the industry is finally facing an event it can’t trade through.

From the pandemic to the Greek debt crisis, exchange-traded funds have operated like it was business as usual during some of the toughest times in markets. But with Russia’s war on Ukraine, the industry is finally facing an event it can’t trade through.

The announcement Wednesday that a tiny Tokyo-listed product will halt trading next week means every Russia-focused stock ETF in the world is now suspended or will be soon. That kind of shutdown is something events like the Arab Spring and even COVID never managed to do.

Investors turn to these products in times of turmoil both as sources of liquidity and vehicles of price discovery when assets tracked by the funds become stuck. But the financial fallout from Russia’s invasion of Ukraine is so extreme that this time around, fund issuers can no longer make the untradeable tradable.

“These are extraordinary circumstances, a situation that we’ve never lived through during the era of ETFs,” said Ben Johnson, director of global ETF research for Morningstar Inc. “This is an episode where we learned what the limitations are.”

The sanctions targeting Russia for the invasion and the country’s own response -- including a domestic market shutdown and capital controls -- mean the Russian stocks held by a swath of ETFs are untradeable. In previous similar episodes, like when Egyptian markets shuttered for almost two months during the Arab Spring, funds kept transacting on expectations the bourse would eventually reopen. The underlying assets and funds fell into line when it did.

The issue with Russia is that even if the Moscow market reopens, restrictions will mean the ETFs still can’t buy or sell Russian assets.